The next new trend: High-frequency trading securities class actions?

Securities class actions as a whole may be down in the first half of 2014, but one particular area of securities class actions may be an indication of a new trend — suits over high-frequency trading.

According to the 2014 midyear assessment released by Cornerstone Research and Stanford Law School, one of the 78 securities class action lawsuits filed in the first half of 2014 concerns high-frequency trading. While most of the filed securities class action suits target individuals, this particular lawsuit is unique in that exchanges, brokerages and trading firms are listed as defendants.

The case, in which the city of Providence, Rhode Island, is suing BATS Global Markets Inc. and others, combines five different previous lawsuits into one class. The court document submitted on April 18, 2014 indicates that the plaintiffs seek to represent a class of “all public investors who purchased and/or sold shares of stock on a U.S.-based exchange or alternate trading venue.”

High-frequency trading, or the act of using electronic trading to act immediately on fluctuations in stock prices, has undergone recent criticism. Because of the complexity of high-frequency trading and the multiple actors involved, says John Gould, a Cornerstone senior vice president, securities class actions are tough to litigate.

“Daily trading data required to assess allegations in these cases will not only be voluminous, but will relate to the interaction of activity among multiple exchanges, dark pools, broker-dealers, proprietary accounts and customer accounts,” Gould told Reuters.

High-frequency trading has recently seen its moment in the spotlight, especially following the release of Michael Lewis’s book “Flash Boys” detailing the practice. Among those looking to strike down the practice are Securities and Exchange Commission (SEC) chair Mary Jo White, who announced in June that the SEC is undertaking measures to limit high-frequency trading.

“Many market structure rules and industry practices were developed with manual markets in mind,” White said. “They cannot be expected to optimally address all of today’s market practices.” White also added that the SEC will be changing the system to eliminate “aggressive, destabilizing trading strategies in vulnerable market conditions.”

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Zach Warren

Zach Warren is Assistant Editor of InsideCounsel magazine, where he oversees online content submissions and administers InsideCounsel's enewsletters. Zach specializes in new media and multimedia...